According to the Bureau of Economic Analysis’ latest report, the US’ GDP has fallen two quarters in a row, a common - but not conclusive - indication of recession.[1] As experts debate the state of our country’s economy this year, ensuring your business weathers the economic storm should be top of mind. A straightforward way to ensure you survive and thrive during these uncertain times is by managing your cash flow.

Why It’s Important To Set Aside Cash Right Now

If cash flow is the lifeblood of your business, cash reserves are the emergency fund or buffer and are usually made up of cash, savings, or other assets. Having cash on hand helps you fill potential gaps in expenses or sales. As many businesses did during the first pandemic wave, it can also provide crucial capital if you need to expand, move, or pivot quickly.

That extra cash can be even more critical when your company is facing a possible recession or market downturn, which usually means less consumer spending. Despite these advantages, 32% of small businesses have less than 30 days of operating expenses available,[2] and 57% have less than $5,000.[3]

How Much Cash Reserve Should A Company Have On Hand?

According to experts, setting aside 3-6 months’ worth of expenses is a good rule of thumb. But the right answer will vary depending on several factors, like your:

  • Business stage and access to funding
  • Goals and long-term growth plan
  • Inventory and/or services or products provided
  • Industry environment
  • Location and real estate
  • Number of staff and other operating expenses

For example, a lean remote tech startup with a small team can often get by with a smaller cash reserve than a large retail business with multiple locations and a sizable staff.

Also, consider the economy. During a recession or market downtown, having more cash on hand helps pay workers, keeps the off ice lights on, and prevents you from relying on emergency funding at high interest rates.

Fun fact: it’s not always better to have a lot of cash on hand. Big cash reserves don’t actively contribute to business growth and leaving money lying stagnant may cause you to miss out on growth opportunities. Plus, investors like to see growing balance sheets, not flat lines.

If you plan on tucking more than 6-12 months’ worth of expenses away, consider how that money can be used to better support the company long-term.

Managing Your Cash Flow Successfully

Avoid setting too little (or too much) cash aside for your business by creating a cash flow projection. This starts by looking at your current cash balance, estimated sales, and fixed and variable expenses. Tools like PNC’s Cash Flow Insight® can give you a window into your financials and performance.

Once the funds are in place, make sure you keep them somewhere fairly accessible. A cash reserve doesn’t have to be dollars and cents as long as you can liquidate it quickly, usually within 90 days. Consider options like a high-yield savings account (HYSA), which keeps money safe and close while earning interest.  

Another option is putting that business “emergency fund” to work for you. Prevent cash flow stagnation by investing in a secure money market account, Certificate of Deposit (CD), bonds, or securities.

If sales are slowing or you’re dealing with low cash flow, there are plenty of ways to pad the savings account, like lines of credit, cash advances, or a business loan.

You Can’t Be Too Prepared

Is the US headed for a recession or not? With high inflation rates and a rebounding labor market, the answer isn’t clear. But one thing’s for certain: there’s no better time for making a financial backup plan. Start by exploring your cash flow management options with PNC Bank today.